mstr-10q_20190331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number 000-24435

MICROSTRATEGY INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

51-0323571

(I.R.S. Employer

Identification Number)

1850 Towers Crescent Plaza, Tysons Corner, VA

(Address of Principal Executive Offices)

22182

(Zip Code)

(703) 848-8600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s class A common stock and class B common stock outstanding on April 15, 2019 was 8,204,395 and 2,035,184, respectively.

 

 


MICROSTRATEGY INCORPORATED

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

1

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

1

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

2

 

 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2019 and 2018

3

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity as of March 31, 2019

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

 

Item 4.

 

Controls and Procedures

30

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

31

 

 

 

 

Item 1A.

 

Risk Factors

31

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

 

Item 5.

 

Other Information

44

 

 

 

 

Item 6.

 

Exhibits

44

 

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MICROSTRATEGY INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

258,743

 

 

$

109,924

 

Restricted cash

 

 

922

 

 

 

862

 

Short-term investments

 

 

292,314

 

 

 

466,186

 

Accounts receivable, net

 

 

133,922

 

 

 

171,359

 

Prepaid expenses and other current assets

 

 

32,511

 

 

 

30,068

 

Total current assets

 

 

718,412

 

 

 

778,399

 

Property and equipment, net

 

 

54,832

 

 

 

51,919

 

Right-of-use assets

 

 

87,743

 

 

 

0

 

Deposits and other assets

 

 

8,374

 

 

 

8,134

 

Deferred tax assets, net

 

 

18,983

 

 

 

17,316

 

Total assets

 

$

888,344

 

 

$

855,768

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses, and operating lease liabilities

 

$

37,227

 

 

$

33,684

 

Accrued compensation and employee benefits

 

 

36,713

 

 

 

48,045

 

Deferred revenue and advance payments

 

 

190,070

 

 

 

176,540

 

Total current liabilities

 

 

264,010

 

 

 

258,269

 

Deferred revenue and advance payments

 

 

4,539

 

 

 

6,469

 

Operating lease liabilities

 

 

106,661

 

 

 

0

 

Other long-term liabilities

 

 

34,793

 

 

 

61,262

 

Deferred tax liabilities

 

 

35

 

 

 

37

 

Total liabilities

 

 

410,038

 

 

 

326,037

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock undesignated, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding

 

 

0

 

 

 

0

 

Class A common stock, $0.001 par value; 330,000 shares authorized; 15,850 shares issued and 8,202 shares outstanding, and 15,837 shares issued and 8,552 shares outstanding, respectively

 

 

16

 

 

 

16

 

Class B convertible common stock, $0.001 par value; 165,000 shares authorized; 2,035 shares issued and outstanding, and 2,035 shares issued and outstanding, respectively

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

581,429

 

 

 

576,957

 

Treasury stock, at cost; 7,648 shares and 7,285 shares, respectively

 

 

(634,405

)

 

 

(586,161

)

Accumulated other comprehensive loss

 

 

(9,964

)

 

 

(10,217

)

Retained earnings

 

 

541,228

 

 

 

549,134

 

Total stockholders' equity

 

 

478,306

 

 

 

529,731

 

Total liabilities and stockholders' equity

 

$

888,344

 

 

$

855,768

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

1


MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

Product licenses

 

$

18,291

 

 

$

17,301

 

Subscription services

 

 

7,144

 

 

 

7,662

 

Total product licenses and subscription services

 

 

25,435

 

 

 

24,963

 

Product support

 

 

71,450

 

 

 

74,415

 

Other services

 

 

18,481

 

 

 

23,589

 

Total revenues

 

 

115,366

 

 

 

122,967

 

Cost of revenues:

 

 

 

 

 

 

 

 

Product licenses

 

 

519

 

 

 

2,211

 

Subscription services

 

 

3,598

 

 

 

3,249

 

Total product licenses and subscription services

 

 

4,117

 

 

 

5,460

 

Product support

 

 

7,067

 

 

 

4,796

 

Other services

 

 

14,989

 

 

 

14,929

 

Total cost of revenues

 

 

26,173

 

 

 

25,185

 

Gross profit

 

 

89,193

 

 

 

97,782

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

48,760

 

 

 

51,335

 

Research and development

 

 

28,215

 

 

 

23,560

 

General and administrative

 

 

22,604

 

 

 

22,172

 

Total operating expenses

 

 

99,579

 

 

 

97,067

 

(Loss) income from operations

 

 

(10,386

)

 

 

715

 

Interest income, net

 

 

2,566

 

 

 

2,034

 

Other expense, net

 

 

(596

)

 

 

(1,594

)

(Loss) income before income taxes

 

 

(8,416

)

 

 

1,155

 

Benefit from income taxes

 

 

(510

)

 

 

(518

)

Net (loss) income

 

 

(7,906

)

 

 

1,673

 

Basic (loss) earnings per share (1)

 

$

(0.77

)

 

$

0.15

 

Weighted average shares outstanding used in computing basic (loss) earnings per share

 

 

10,328

 

 

 

11,447

 

Diluted (loss) earnings per share (1)

 

$

(0.77

)

 

$

0.15

 

Weighted average shares outstanding used in computing diluted (loss) earnings per share

 

 

10,328

 

 

 

11,488

 

 

(1)

Basic and fully diluted (loss) earnings per share for class A and class B common stock are the same.

The accompanying notes are an integral part of these Consolidated Financial Statements.


2


MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Net (loss) income

 

$

(7,906

)

 

$

1,673

 

Other comprehensive (loss) income, net of applicable taxes:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(162

)

 

 

1,440

 

Unrealized gain on short-term investments

 

 

415

 

 

 

0

 

Total other comprehensive income

 

 

253

 

 

 

1,440

 

Comprehensive (loss) income

 

$

(7,653

)

 

$

3,113

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

3


MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Convertible

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

Total

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

Balance at January 1, 2018

 

$

605,726

 

 

 

15,817

 

 

$

16

 

 

 

2,035

 

 

$

2

 

 

$

559,918

 

 

 

(6,405

)

 

$

(475,184

)

 

$

(5,659

)

 

$

526,633

 

Net income

 

 

1,673

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,673

 

Other comprehensive income

 

 

1,440

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,440

 

 

 

0

 

Share-based compensation expense

 

 

4,743

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

4,743

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Balance at March 31, 2018

 

$

613,582

 

 

 

15,817

 

 

$

16

 

 

 

2,035

 

 

$

2

 

 

$

564,661

 

 

 

(6,405

)

 

$

(475,184

)

 

$

(4,219

)

 

$

528,306

 

Net income

 

 

4,828

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

4,828

 

Other comprehensive loss

 

 

(3,892

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(3,892

)

 

 

0

 

Issuance of class A common stock under stock option plans

 

 

2,471

 

 

 

20

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,471

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Share-based compensation expense

 

 

3,370

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,370

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Balance at June 30, 2018

 

$

620,359

 

 

 

15,837

 

 

$

16

 

 

 

2,035

 

 

$

2

 

 

$

570,502

 

 

 

(6,405

)

 

$

(475,184

)

 

$

(8,111

)

 

$

533,134

 

Net income

 

 

12,699

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

12,699

 

Other comprehensive loss

 

 

(607

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(607

)

 

 

0

 

Share-based compensation expense

 

 

2,972

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,972

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Balance at September 30, 2018

 

$

635,423

 

 

 

15,837

 

 

$

16

 

 

 

2,035

 

 

$

2

 

 

$

573,474

 

 

 

(6,405

)

 

$

(475,184

)

 

$

(8,718

)

 

$

545,833

 

Net income

 

 

3,301

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,301

 

Other comprehensive loss

 

 

(1,499

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,499

)

 

 

0

 

Purchases of treasury stock

 

 

(110,977

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(880

)

 

 

(110,977

)

 

 

0

 

 

 

0

 

Share-based compensation expense

 

 

3,483

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,483

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Balance at December 31, 2018

 

$

529,731

 

 

 

15,837

 

 

$

16

 

 

 

2,035

 

 

$

2

 

 

$

576,957

 

 

 

(7,285

)

 

$

(586,161

)

 

$

(10,217

)

 

$

549,134

 

Net loss

 

 

(7,906

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(7,906

)

Other comprehensive income

 

 

253

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

253

 

 

 

0

 

Issuance of class A common stock under stock option plans

 

 

1,507

 

 

 

13

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,507

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Purchases of treasury stock

 

 

(48,244

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(363

)

 

 

(48,244

)

 

 

0

 

 

 

0

 

Share-based compensation expense

 

 

2,965

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,965

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Balance at March 31, 2019

 

$

478,306

 

 

 

15,850

 

 

$

16

 

 

 

2,035

 

 

$

2

 

 

$

581,429

 

 

 

(7,648

)

 

$

(634,405

)

 

$

(9,964

)

 

$

541,228

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

4


MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(7,906

)

 

$

1,673

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,664

 

 

 

3,298

 

Bad debt expense

 

 

827

 

 

 

165

 

Net realized loss on short-term investments

 

 

41

 

 

 

0

 

Deferred taxes

 

 

(1,694

)

 

 

(2,662

)

Share-based compensation expense

 

 

3,017

 

 

 

4,743

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,266

 

 

 

422

 

Prepaid expenses and other current assets

 

 

(3,070

)

 

 

(3,783

)

Deposits and other assets

 

 

(134

)

 

 

228

 

Accounts payable and accrued expenses

 

 

(3,108

)

 

 

(6,016

)

Accrued compensation and employee benefits

 

 

(12,195

)

 

 

(8,085

)

Deferred revenue and advance payments

 

 

38,502

 

 

 

19,570

 

Operating lease liabilities

 

 

(2,074

)

 

 

0

 

Other long-term liabilities

 

 

320

 

 

 

9,164

 

Net cash provided by operating activities

 

 

26,456

 

 

 

18,717

 

Investing activities:

 

 

 

 

 

 

 

 

Proceeds from redemption of short-term investments

 

 

314,403

 

 

 

195,820

 

Purchases of property and equipment

 

 

(6,011

)

 

 

(1,294

)

Purchases of short-term investments

 

 

(138,099

)

 

 

(483,440

)

Net cash provided by (used in) investing activities

 

 

170,293

 

 

 

(288,914

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of class A common stock under exercise of employee stock options

 

 

1,507

 

 

 

0

 

Purchases of treasury stock

 

 

(48,244

)

 

 

0

 

Payments on capital lease obligations and other financing arrangements prior to the adoption of ASU 2016-02

 

 

0

 

 

 

(7

)

Net cash used in financing activities

 

 

(46,737

)

 

 

(7

)

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(1,133

)

 

 

2,202

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

148,879

 

 

 

(268,002

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

110,786

 

 

 

421,182

 

Cash, cash equivalents and restricted cash, end of period

 

$

259,665

 

 

$

153,180

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

5


MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying Consolidated Financial Statements of MicroStrategy Incorporated (“MicroStrategy” or the “Company”) are unaudited.  In the opinion of management, all adjustments necessary for a fair statement of financial position and results of operations have been included.  All such adjustments are of a normal recurring nature, unless otherwise disclosed. Interim results are not necessarily indicative of results for a full year.

As discussed in Note 2, Recent Accounting Standards, to the Consolidated Financial Statements, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments (“ASU 2016-02”) effective January 1, 2019. Comparative prior period Consolidated Financial Statements have not been restated and are not directly comparable to the current period Consolidated Financial Statements.

The Consolidated Financial Statements and Notes to Consolidated Financial Statements are presented as required by the United States Securities and Exchange Commission (“SEC”) and do not contain certain information included in the Company’s annual financial statements and notes.  These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  There have been no significant changes in the Company’s accounting policies since December 31, 2018, except as discussed below with respect to the Company’s adoption of ASU 2016-02.

The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The Company is not aware of any subsequent event that would require recognition or disclosure.

(b) Leases

 

ASU 2016-02 defines a lease as a contract, or part of a contract, that conveys the right to both (i) obtain economic benefits from and (ii) direct the use of an identified asset for a period of time in exchange for consideration.  Under ASU 2016-02, the Company evaluates its contracts to determine if they contain a lease and classifies any lease components identified as an operating or finance lease.  For each lease component, the Company recognizes a right-of-use (“ROU”) asset and a lease liability.  ROU assets and lease liabilities are presented separately for operating and finance leases; however, the Company currently has no material finance leases.  The Company’s operating leases are primarily related to office space in the United States and foreign locations.

 

In a contract that contains a lease, a component is an item or activity that transfers a good or service to the lessee.  Such contracts may be comprised of lease components, non-lease components, and elements that are not components.  Each lease component represents a lessee’s right to use an underlying asset in the contract if the lessee can benefit from the right of use of the asset either on its own or together with other readily available resources and if the right of use is neither highly dependent nor highly interrelated with other rights of use. Non-lease components include items such as common area maintenance and utilities provided by the lessor.  The Company has elected the practical expedient provided in ASU 2016-02 to not separate lease components from non-lease components for office space, which is the Company’s only material underlying asset class.  For each lease within this asset class, the non-lease components and related lease components are accounted for as a single lease component.  Items or activities that do not transfer goods or services to the lessee, such as administrative tasks to set up the contract and reimbursement or payment of lessor costs, are not components of the contract and therefore no contract consideration is allocated to such items or activities.

 

Consideration in the contract is comprised of any fixed payments and variable payments that depend on an index or rate. Payments in the Company's operating lease arrangements are typically comprised of base office rent and parking fees.  Costs related to the Company’s non-lease components, as described above, are generally variable and do not depend on an index or rate and are therefore excluded from the contract consideration allocated to the lease components.  The Company’s operating lease arrangements generally do not contain any payments related to items or activities that are not components.

 

6


MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Operating lease liabilities are initially and subsequently measured at the present value of unpaid lease payments, discounted at the discount rate of the lease.  Operating lease ROU assets are initially measured as the sum of the initial lease liability, any initial direct costs incurred, and any prepaid lease payments, less any lease incentives received.  The ROU asset is amortized over the term of the lease. A single lease expense is recorded within operating expenses in the consolidated statements of operations on a straight-line basis over the lease term. Variable lease payments that are not included in the measurement of the lease liability are recognized in the period when the obligations for those payments are incurred. In the Company's lease agreements, these variable payments typically include certain taxes, utilities, and maintenance costs, and other fees.

 

The Company uses its incremental borrowing rate as the discount rate for all of its leases, as the rate implicit in the lease is not readily determinable in any of its lease contracts. In determining the incremental borrowing rate, the Company considers its credit risk profile, the currency of the contract, the economic environment in which the lease exists, and the term of the lease.

 

The Company does not recognize lease liabilities or ROU assets for any short-term leases with a non-cancellable lease term of 12 months or less. Instead the lease payments for these short-term leases are expensed on a straight-line basis over the lease term, and any variable payments are recognized in the period when the obligations for those payments are incurred.  The Company believes that, using this methodology, expense reasonably reflects the Company’s short-term lease commitments.

 

 

(2) Recent Accounting Standards

Lease accounting

 

The Company adopted ASU 2016-02 effective as of January 1, 2019 and elected the transition option to apply the new lease requirements as of the adoption date without restating comparative periods presented in its financial statements. Additionally, the Company elected the package of practical expedients described in ASU 2016-02, which includes not reassessing the following: (i) lease classification of existing leases, (ii) whether expired or existing contracts contain leases, and (iii) initial direct costs for existing leases.  

 

Upon adoption of ASU 2016-02, the Company recognized additional ROU assets of $88.8 million, additional total lease liabilities of $116.9 million, reductions in total deferred rent of $28.5 million, and reductions in prepaid expenses of $0.4 million in its 2019 beginning balances. All adjustments relate to the Company’s operating leases; the Company does not have any material leases that are classified as finance leases. There was no cumulative effect adjustment to the Company's 2019 beginning retained earnings balance, as the Company did not have material unamortized initial direct costs. Beginning with the three months ended March 31, 2019, the Company presents the amortization of its operating ROU assets and the change in its operating lease liabilities within the operating activities section of its consolidated statements of cash flows. The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated results of operations.  

 

Cloud computing arrangements

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 requires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize and which costs to expense. Under this model, customers would need to determine the nature of the implementation costs and the project stage in which they are incurred to determine which costs to capitalize or expense.  Customers would be required to amortize the capitalized implementation costs over the term of the hosting arrangement, which might extend beyond the noncancelable period if there are options to extend or terminate. ASU 2018-15 specifies the financial statement presentation of capitalized implementation costs and related amortization in addition to required disclosures for material capitalized implementation costs related to hosting arrangements that are service contracts. The standard is effective for interim and annual periods beginning January 1, 2020.  Early adoption is permitted.  Entities can choose to adopt this guidance prospectively to eligible costs incurred on or after the date the guidance is first applied, or to adopt the guidance retrospectively.  The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.  

 

7


MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Credit losses

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost (including trade accounts receivable), net investments in leases, and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. ASU 2016-13 also changes the impairment accounting for available-for-sale debt securities, requiring credit losses to be recorded through an allowance for credit losses. The standard is effective for interim and annual periods beginning January 1, 2020.  Early adoption is permitted.  A modified retrospective adoption method is required, with a cumulative-effect adjustment to the opening retained earnings balance in the period of adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, cash flows, and disclosures.

 

(3) Short-term Investments

The Company periodically invests a portion of its excess cash in short-term investment instruments.  All of the Company’s short-term investments are in U.S. Treasury securities and all short-term investments have stated maturity dates between three months and one year from the purchase date.  All short-term investments are included within “Short-term investments” on the accompanying Consolidated Balance Sheets.  The fair value of the Company’s short-term investments is determined based on quoted market prices in active markets for identical securities (Level 1 inputs). As of March 31, 2019 and December 31, 2018, all short-term investments were classified as available-for-sale and reported at fair value.  

The amortized cost and fair value of available-for-sale investments at March 31, 2019 were $292.3 million and $292.3 million, respectively.  The amortized cost and fair value of available-for-sale investments at December 31, 2018 were $466.6 million and $466.2 million, respectively.  The total gross unrecognized holding losses accumulated in other comprehensive loss were not material as of March 31, 2019 and December 31, 2018. The total gross unrecognized holding gains accumulated in other comprehensive loss were not material as of March 31, 2019 and December 31, 2018.  No other-than-temporary impairments related to these investments have been recognized as of March 31, 2019 and December 31, 2018.  

 

 

(4) Contract Balances

The Company invoices its customers in accordance with billing schedules established in each contract.  The Company’s rights to consideration from customers are presented separately in the Company’s Consolidated Balance Sheets depending on whether those rights are conditional or unconditional.  

The Company presents unconditional rights to consideration from customers within “Accounts receivable, net” in its Consolidated Balance Sheets.  All of the Company’s contracts are generally non-cancellable and/or non-refundable and therefore an unconditional right generally exists when the customer is billed or amounts are billable per the contract.  

 

Accounts receivable (in thousands) consisted of the following, as of:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Billed and billable

 

$

138,490

 

 

$

176,848

 

Less: allowance for doubtful accounts

 

 

(4,568

)

 

 

(5,489

)

Accounts receivable, net

 

$

133,922

 

 

$

171,359

 

 

The Company maintains an allowance for doubtful accounts, which represents its best estimate of probable losses inherent in the accounts receivable balances.  The Company evaluates specific accounts when it becomes aware that a customer may not be able to meet its financial obligations due to deterioration of the customer’s liquidity, financial viability, or credit ratings or the customer’s bankruptcy.  In addition, the Company periodically adjusts this allowance based on its review and assessment of the aging of receivables. For the three months ended March 31, 2019 and 2018, the Company’s bad debt expense and write-offs totaled $0.8 million and $0.2 million, respectively.

8


MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In contrast, rights to consideration that are subject to a condition other than the passage of time are considered contract assets and presented within “Prepaid expenses and other current assets” in the Consolidated Balance Sheets since the rights to consideration are expected to become unconditional and transfer to accounts receivable within one year.  Contract assets generally consist of accrued sales and usage-based royalty revenue.  In these arrangements, consideration is not billed or billable until the royalty reporting is received, generally in the subsequent quarter, at which time the contract asset transfers to accounts receivable and a true-up adjustment is recorded to revenue.  During the three months ended March 31, 2019 and 2018, there were no significant impairments to the Company’s contract assets, nor were there any significant changes in the timing of the Company’s contract assets being reclassified to accounts receivable. Contract assets included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheets consisted of $1.2 million and $0.8 million in accrued sales and usage-based royalty revenue as of March 31, 2019 and December 31, 2018, respectively.

Contract liabilities are amounts received or due from customers in advance of the Company transferring the products or services to the customer.  Revenue is subsequently recognized in the period(s) in which control of the products or services is transferred to the customer.  The Company’s contract liabilities are presented as either current or non-current “Deferred revenue and advance payments” in the Consolidated Balance Sheets, depending on whether the products or services are expected to be transferred to the customer within the next year.  

Deferred revenue and advance payments (in thousands) from customers consisted of the following, as of:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Current:

 

 

 

 

 

 

 

 

Deferred product licenses revenue

 

$

555

 

 

$

1,768

 

Deferred subscription services revenue

 

 

15,641

 

 

 

13,508

 

Deferred product support revenue

 

 

166,306

 

 

 

152,501

 

Deferred other services revenue

 

 

7,568

 

 

 

8,763

 

Total current deferred revenue and advance payments

 

$

190,070

 

 

$

176,540

 

 

 

 

 

 

 

 

 

 

Non-current:

 

 

 

 

 

 

 

 

Deferred product licenses revenue

 

$

479

 

 

$

542

 

Deferred subscription services revenue

 

 

247

 

 

 

2,384

 

Deferred product support revenue

 

 

3,231

 

 

 

3,091

 

Deferred other services revenue

 

 

582

 

 

 

452

 

Total non-current deferred revenue and advance payments

 

$

4,539

 

 

$

6,469

 

During the three months ended March 31, 2019 and 2018, the Company recognized revenues of $67.0 million and $74.6 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of the respective year.  For the three months ended March 31, 2019 and 2018, there were no significant changes in the timing of revenue recognition on the Company’s deferred balances.

As of March 31, 2019, the Company had an aggregate transaction price of $194.6 million allocated to unsatisfied performance obligations related to product support, subscription services, other services, and product licenses contracts.  The Company expects to recognize $190.1 million within the next 12 months and $4.5 million thereafter.

 

 

9


MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(5) Leases

 

The Company leases office space in the United States and foreign locations under operating lease agreements. Office space is the Company’s only material underlying asset class under operating lease agreements. The Company has no material finance leases.

 

Under the Company’s office space lease agreements, fixed payments and variable payments that depend on an index or rate are typically comprised of base rent and parking fees. Additionally, under these agreements the Company is generally responsible for certain variable payments that typically include certain taxes, utilities and maintenance costs, and other fees. These variable lease payments are generally based on the Company’s occupation or usage percentages and are subject to adjustments by the lessor.

 

As of March 31, 2019, the Company’s ROU asset and total lease liability balances were comprised of $74.3 million and $101.6 million, respectively, for leases in the United States and $13.4 million and $14.2 million, respectively, for foreign leases. The Company’s most significant lease is for its corporate headquarters, in which it leases approximately 214,000 square feet of office space at a location in Northern Virginia. The ROU asset and total lease liability balances related to the Company’s corporate headquarters lease were $69.5 million and $96.7 million, respectively, as of March 31, 2019. The lease agreement for the Company’s corporate headquarters location is set to expire in December 2030, with an option for the Company to extend the term for an additional five or 10 consecutive years. The Company is currently not reasonably certain it will exercise this renewal option and therefore has not included the renewal option in the lease term. Several of the Company’s remaining leases also contain options for renewal or options to terminate all or a portion of the leased space. The Company continually assesses the likelihood of exercising these options and recognizes an option as part of its ROU assets and lease liabilities if and when it is reasonably certain that it will exercise the option.

 

The following table presents the Company’s total lease cost and other lease details for the three months ended March 31, 2019 (in thousands, except years and discount rate):

 

Lease cost:

 

 

 

 

Operating lease cost

 

$

3,769

 

Short-term lease cost

 

 

814